Tuesday, December 4, 2012

College Used to Be the American Dream -- Now It's the American Nightmare

College Used to Be the American Dream -- Now It's the American Nightmare

Escalating delinquency rates make student loans look like the new subprime.

November 28, 2012 |

Photo Credit: Shutterstock.com

Now that student loans
are undeniably in bubble territory, the officialdom is starting to wake
up and take notice. Evidence that students were taking on so much debt
as a group that it was undermining their ability to be Good American
Consumers wasn’t enough. A recent New York Fed study found that 94% of
recent graduates had borrowed to help pay for their education, and
average debt levels among student borrowers is $23,000. Remember, that
average includes seasoned borrowers, who presumably borrowed less and
also in many cases reduced the principal amount of their loans, so the
average amount borrowed by recent grads is certain to be higher. Student
debt is senior to all other consumer debt; unlike, say, credit card
balances, Social Security payments can be garnished to pay
delinquencies. As a result, it has contributed to the fall in the
homeownership rate, since many young people who want to buy a house
can’t because their level of student debt prevents them from getting a
mortgage.
But despite some pious noises about the burden that
student loans place on young Americans, there’s been no willingness in
the officialdom to do much about it. But that may finally be changing.
The latest Federal Reserve data is grim.Student loan delinquencies are getting into nosebleed territory. The Wall Street Journal, citing New York Fed data, tells us that student debt outstanding increased 4.6% in the last quarter.
Repeat: in the last quarter. Annualized, that’s a 19.7% rate of
increase* during a period when other consumer borrowings were on the
decline. And this growth is taking place while borrower distress is
becoming acute. 11% of the loans were 90+ days delinquent, up from 8.9%
at the close of last quarter. The underlying credit picture is certain
to be worse, since many borrowers aren’t even required to service loans
(as in they are still in school or have gotten a postponement, which is
available to the unemployed for a short period). And it was the only
type of consumer debt to show rising delinquency rates.
This is
the new subprime: escalating borrowing taking place as loan quality is
lousy and getting worse. And in keeping with parallel to subprime, one
of the big reasons is, to use a cliche from that product, anyone who can
fog a mirror can get a loan.
The most popular type of loan,
Stafford loans, allow undergraduates to borrow up to $57,500, no
questions asked. Perversely, this practice, in isolation, looks
rational. Look, if you could put borrowers in virtual debt slavery,
would you care much about lending standards? All you need to worry about
is death and those few cases where borrowers are so clearly unable to
ever work for a decent amount of money that they can get their student
debt that they can get their loans reduced or discharged.
Things
are so bad that each media report seems able to present anecdotes more
extreme than previous accounts. The WSJ found a recent graduate of
Embry-Riddle Aeronautical University in Daytona Beach whose education
loans total nearly $230,000 for a college education that has enabled him
to get a job that pays $60,000. And $184,500 of that total was borrowed
by his unemployed, disabled mother through a program called Parent
Plus.
The Administration’s responses look inadequate given the scale of the problem. From the WSJ:

In
an effort to reduce defaults, the Education Department has tightened
standards for loans to parents and grad students, prohibited federal
lending to schools if more than a certain percentage of its graduates
default over several years, and allowed borrowers to postpone payments
during periods of “hardship.” The administration also has finalized
rules that enable certain borrowers to have their remaining debt
forgiven after 20 years, provided that they make monthly payments at 10%
of discretionary income—down from the previous standard of 15%.

And no wonder, this Administration is as committed to “affordable education” as previous Administrations have been to “affordable homes“:

President Barack Obama championed easy-to-get loans during the campaign, calling higher education
“an economic imperative in the 21st century.” A spokesman for Education
Secretary Arne Duncan said the goal is “to make student loans available
to as many people as possible,” and requiring minimum credit scores
would block many Americans from going to college.

It
isn’t hard to see why Team Obama is all on board with student debt
peonage. Students have always been important forces in revolutionary
movements: they are high functioning, live in dense communities, which
facilitates organizing, and are naive enough to believe their actions
can make a difference. Inescapable debt greatly increased the risk of
fighting the established order; a mere arrest record hurts employment
prospects. Of course, Republican criticism of overly generous student
lending also has to be taken with a fistful of salt: Conservatives view
higher education as indoctrination camps for socialism. So on odd days,
they’ll try to rein in student funding and on even days, will blame
unemployment on unskilled American workers losing out to the better
trained and harder working Chinese. (This is not to deny that the US is
in a serious higher education cost bubble, which in large measure is due
to expenses that have nothing to do with the quality of teaching, such
as much bigger and better paid administration staffs, and lavish
facilities, like upscale gyms).
Like buying a house, getting a
higher education was part of the American dream, a way to invest to
build a secure future. Reckless lending and the costly efforts to
socialize the losses are turning both into American nightmares.
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*Annualized is NOT the quarterly rate X 4. It’s treated as a compound growth rate. And yes, I checked the WSJ figure against the Fed’s second quarter household debt and credit report
to make sure they did mean a 4.6% increase in the quarter, as opposed
to a 4.6% annualized rate of increase. This is also the start of a new
school term for most students, so one would expect new students entering
college to produce a bigger increase than in the other quarters of the
year